OECD housing alarm ‘nothing new’, says economist

By Francesca Krakue

06 March 2017

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A senior economist has stressed that the OECD’s warning about Australia’s house prices is not new, although he agrees that excessive house price and household debt growth is Australia’s “Achilles’ heel”.

In its latest Economic Survey of Australia released last week, the Organisation for Economic Cooperation and Development (OECD) said that the country is vulnerable to a “rout” on house prices and demand with significant macroeconomic implications, due to an above average level of household debt.

“What they’re saying is not new, it’s been said before… Since 2003, 2004 we’ve heard the same warnings over and over,” AMP Capital chief economist Shane Oliver told Mortgage Business.

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“People, including myself, have been worrying about it for a long time, and it hasn’t happened… There’s a risk there but it’s hard to see a trigger for a crash, because you need much higher interest rates or you’d need much higher unemployment or you’d need a massive oversupply of property,” Mr Oliver said.

“Unemployment is unlikely to rise sharply unless perhaps the Chinese economy crashes... and yes, we’re seeing a pick-up in unit supply, but that pick-up would have to go on for several years to cause a major crash in the property market.

“The risk is certainly there and it’s worth being aware of, but we have heard these warnings over and over, during the last thirteen years or so.”

However, in saying this, Mr Oliver acknowledged that the OECD’s observations are correct.

“The OECD is right… If the property market goes bust in a big way and there is a risk there, then that would adversely affect the economy,” he said.

“I think this combination of excessive house price growth and excessive household debt growth in Australia is Australia’s Achilles heel.”

In its report, the OECD said Australia’s house prices and household debt have reached “unprecedented highs”, in part because policy rate cuts have lowered debt servicing costs.

“In real terms, house prices have increased by 250 per cent since the mid-1990s. Furthermore, the ratio of house prices to incomes has undergone further increase in recent years, straining affordability, especially for first-time buyers in Sydney,” it said.

“Foreign demand for housing, while a contributing factor, does not appear to have had a substantial impact on price growth. There are signs that the housing market is cooling. Recent data shows price growth has eased in most urban centres, reflecting in part a substantial supply response – dwelling approvals and investments have increased substantially in recent years.

“However, the significant increase in Australia’s house prices and price-to-income ratios remains. A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy,” the report said.

RBA likely to take findings into consideration

The OECD study also said Australia’s low interest rates are ramping up risk-taking by investors and driving house prices and mortgage lending to “historical highs”.

Mr Oliver said the RBA is aware of the issue and is likely to take it into account along with other factors.

“[The RBA] knows that there is an issue there. The governor has regularly referred to that fear that low interest rates are further ramping up household debt.

“But the RBA always faces a balancing act. It has to balance that risk against other risks. [For example,] if the economy were to suddenly slow again, necessitating lower interest rates, then the RBA would have to work out what’s most important.”

Mr Oliver noted that while the OECD has sounded an alarm on Australia’s low interest rates, on the other hand, the International Monetary Fund urged the RBA to cut interest rates again.

“In one of their most recent reports, they made an argument that rates should be cut a lot lower in Australia for fear that if they don't cut further, then low inflation will become entrenched,” he said.

“I think the RBA takes account of all of these issues and has to weigh them up in the great scheme of things. There's not much more they can do.

“At the end of the day, the big issue here is affordability, and supply and demand. I think the government in Canberra is aware of the fact that they need to do something, their question mark is whether they’ve done enough or if they’re moving quickly.”